There is a lot of confusion regarding independent contractors. Many employers realize that it is not a good idea to pay contractors on a 1099, but believe that if the worker is incorporated, it is okay. This is not necessarily the case. It is very simple to obtain a Federal Tax ID number for a business. This ID number is not an automatic protection from misclassification.

As always the IRS' 20 Point Checklist comes into play. Ultimately, the IRS is going to look at the work environment and who has control. An individual that is incorporated and working at a company could easily be considered an employee depending on the circumstances.

Three Main IRS Factors
Basically, the IRS' 20-Point Checklist focuses on three main factors:
  • How much control the employer has over the worker's behavior and work results. (Who controls training, where and what time the person works, what equipment they use?)
  • How much control the employer has over finances? (Does the employer have primary control over the person's profit or loss?)
  • What is the relationship between the parties? (Does the worker receive benefits? Is it a long-term relationship?)

IRS Questions in Court
Ask the five questions one court asked an employer (company) when considering whether workers were common-law employees:

1. Who recruited them? (Recruiter/company = more risk.)
2. Who trained them? (Company training = more risk.)
3. What was the duration of employment? (Longer assignment = more risk.)
4. Did you have the right to assign extra work? (Yes = more risk.)
5. Did you have control over such things as firing, discipline, and rewards? (Yes = more risk.)


Contractor Payrolling | IRS 20-point Checklist | 1099, W-2 and the IRS | A True Contractor | Does Incorporation Matter? | What Interests the IRS? | Fines and Ramifications | Common Myths


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